High Short Interest Stocks
Taking a Closer Look

High Short Interest Stocks attract a lot of attention, especially during an economic downturn. Attention is given from Hedge Funds, Institutional Traders, Individual Traders, Economists, the Media and Governments, among others.

So why so much attention, and why is greater attention given during an economic downturn? There are many reasons and different groups will have their own reasons.

Investors and traders will increase their attention to high short interest stocks for different reasons. One reason is to try and monitor high short interest stocks to be able to get in early and take advantage of a stock that may possibly decline for whatever reason that caused the high short interest to begin with. This group of people will jump on the trend, or forecasted trend, to the downside.

On the other hand, many Investors and Traders pay close attention to high short interest stocks with the goal of catching a short squeeze. This group is trying to take advantage of a turn of events or possible good news which may cause everyone who is short to have to cover their positions and cause a spike higher in the stock.

So that takes care of Hedge Funds, Institutional Traders and Individual Investors (for the most part), what about Economists, the Media and Governments?

During an economic downturn, many Economists, the Media and Governments seek to find the cause of the downturn and very often will put the blame on whatever they can at the time. People who try to profit from a declining stock price (who contribute to an increasing short interest in particular stocks) are an easy target. Since people who short stocks are profiting during a decline in the economy, they are looked upon as part of the evil and cause of the downturn.

As the downturn gets worse, more and more attention is given in this form of "blame" to help try and make it look like the downturn was due to no other fault.

For a quick comparison, think of Real Estate. Now think of Real Estate Speculators who were Real Estate Investors. As the price of Real Estate went up for many years, everything was seen as a great booming economy and Real Estate Speculators were seen as smart investors.

Now look at how Real Estate has been declining for the last few years. These same Speculators and Investors are given blame for driving up the prices of Real Estate to unsustainable levels. While this blame may not be given continued attention, was the main cause really the Real Estate Speculator who drove up prices? Or did it have something to do with government policies and lending practices that enabled people to purchase Real Estate for higher and higher amounts they simply could not continue to afford without these government policies and lending practices in place?

As far as the attention (blame) given by the Media, Economists and Governments, if you take a closer look at the situation you may see something different than what you are led to believe. Without any research of your own, you will be led to believe that people who participate in short selling and cause a high short interest in stocks are the main and only cause for declining stocks and the stock market as a whole.

I could probably right a book about this topic and argue against this myth, but below I will provide one example that proves otherwise. The first chart is a 1 year chart of Bank of America (BAC) thru mid-March, 2009.

BAC 1 Year

Now take a look at the short interest over the same 1 year time period:

BAC Short Interest

Now let's take a look at a 1 year chart of Green Mountain Coffee Roasters (GMCR) thru mid-March, 2009:

GMCR 1 Year

And here is the short interest over the same time period:

GMCR Short Interest

Looking at the example of BAC above, you can see that the stock for BAC has declined 93% from the high to the low in the last year. In August 2008 BAC was near $30 per share and in December 2008 it was at $15, while the short interest both times was the same as it was last month when the stock was below $5.00.

You can even look at the stock price of BAC from September through October 2008 and see how it declined from $32.50 to $22.50 all while the short interest declined significantly almost to zero.

Looking at GMCR, the stock was at $25 a year ago and is currently near $37.00 which is much closer to it's 52 week high than it's 52 week low. During that same period, the short interest has been steadily increasing, not causing the stocks price to decline.

So how come we keep hearing that short sellers and high short interest stocks are the major cause of the current stock market decline? Looking at the above examples this clearly is not true at all. I think the focus should be shifted to what can really help the economy rather than looking to place the blame where it is unfounded.

This is only one example that is contrary to what you will hear in the media. The key to take away from this (at east one of the key points) is to make sure you do your own research and make your own decisions especially concerning high short interest stocks. Do not rely on something you read or hear about in the media unless you check yourself for confirmation as many times it may actually be a blame or cover up.

While there may be price manipulation at levels which involve large amounts of money to move stock prices, if this is the target of the concerns of the Media and Government, then that is what should be expressed and targeted, not Short Selling as a whole.

Return From "High Short Interest Stocks" To "Short Selling"

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